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““It seems to me that Europe, especially with the addition of more countries, is becoming ever-more susceptible to any asymmetric shock. Sooner or later, when the global economy hits a real bump, Europe’s internal contradictions will tear it apart.”

                             Milton Friedman, circa 1999

FX Trading – Can you say Drachma?
Drachma of course is the old currency Greek citizens used to deal with. Could they be heading back to it soon? Maybe!

Mr. Orwell phone you office!

From the UK Telegraph, Ambrose Evans-Pritchard penned this yesterday [our emphasis]:

“’Recent developments have, perhaps, increased the risk of secession (however modestly), as well as the urgency of addressing it as a possible scenario,’ said the document, entitled Withdrawal and expulsion from the EU and EMU: some reflections.

“The author makes a string of vaulting, Jesuitical, and mischievous claims, as EU lawyers often do. Half a century of ever-closer union has created a ‘new legal order’ that transcends a ‘largely obsolete concept of sovereignty’ and imposes a ‘permanent limitation’ on the states’ rights.

“Those who suspect that European Court has the power pretensions of the Medieval Papacy will find plenty to validate their fears in this astonishing text.

Crucially, he argues that eurozone exit entails expulsion from the European Union as well. All EU members must take part in EMU (except Britain and Denmark, with opt-outs).

This is a warning shot for Greece, Portugal, Ireland and Spain. If they fail to marshal public support for draconian austerity, they risk being cast into Icelandic oblivion. Or for Greece, back into the clammy embrace of Asia Minor.

The spread between Greek and German bonds is widening. We also noticed something else, the single-currency known as the euro, seems to be tracking nicely on the widening spread, as you can see in the charts below. The spread is the top chart and EURUSD bottom chart.

Greek/German Spread Correlation (below) vs. EURUSD (next chart):

Greek/German Spread Correlation Chart


Mr. Market isn’t cooperating with the dream of Greek fiscal austerity. Back to Mr. Evans-Prichart:

“Greece cannot afford such a premium for long. The country must raise €54bn this year – front-loaded in the first half. Unless the spreads fall sharply, the deficit cannot be cut from 12.7pc of GDP to 3pc of GDP within three years. As Moody’s put it, Greece (and Portugal) faces the risk of “slow death” from rising interest costs.”

…and the European Central Bank is now facing explicitly the problem that comes from a single interest rate for economies with differing levels of labor productivity, fiscal discipline, and business cycle performance. Things that are expected to exist for a viable common currency zone.

“As Portugal, Italy, Ireland, Greece, and Spain (PIIGS) slide into deflation, their ‘real’ interest rates will rise even higher. ‘It is tantamount to hiking rates in the already weak PIIGS,’ he said [Mr. Stephen Jen from BlueGold Capital]. This is the crux. ECB policy will become ‘pro-cyclical’, too tight for the South, too loose for the North.

I end today’s missive with two quotes that lead off our 21-page Special Report we penned back in June 2009: Preparing for a Breakup in the European Monetary Union:

Prescient views, we think…

“Politically, though, this unity also has the potential of brining about explosive disunity. During deep recessions, the single, one-size-fits-all monetary policy could pit national politicians against the European Central Bank as a feeling grows of national impotence in the face of rising unemployment. It is not improbable that one or more member countries might withdraw from the euro and reintroduce their national currencies at some stage during the currency’s first decade.”

                             Bill Emmott, 20:21 Vision, Published 2003

“Anybody who still believes that a breakup of the Euro is impossible should at least re-examine this assumption with a skeptical eye. Experience shows that, in confrontations between politics and financial markets, events sometimes move from impossible to inevitable without ever passing through improbable.”

                             GaveKal Research

Just in case you don’t remember what it looked like:

Drachma! See, I knew you could!

Next month, will take a look at the Portuguese escudos—love that name…possibly another old/new currency we can trade again.